APPENDIX 1
Memorandum submitted by UKiSUG
REFORM OF THE EU SUGAR REGIME
1. INTRODUCTION
1.1 UKiSUG is the organisation which represents
the collective interests of the major industrial users of sugar
in the UK, comprising confectionery, chocolate, cakes, biscuits,
soft drinks and ice cream. These sectors represent combined employment
of 90,000 people and are worth £15 billion in consumer sales
per annum. Manufacturers using sugar in processed products account
for about 70 per cent of usage in the UK or nearly 1.2 million
tonnes. UKiSUG Members therefore have a direct and vital interest
in the EU's sugar regime.
1.2 UKiSUG has long campaigned for the reform
of the EU sugar regime which artificially maintains internal prices
at levels well above world price levels. Given the EU's current
WTO commitments to reduce export refunds, further pressure to
liberalise trade under the forthcoming GATT Round and the impetus
to open tariff-free access for sugar from Least-Developed Countries,
the sugar regime cannot be sustained without reform if EU manufacturers,
processors and producers are to remain competitive.
1.3 UKiSUG welcomes the Court of Auditors
latest Special Report No 20/2000 on the regime which is an indictment
of the regime's lack of transparency, anti-competitiveness and
its management by the Commission. UKiSUG believes that its own
arguments in favour of reform are fully vindicated by this Report
and urges the Commission and Council of Ministers to act upon
the recommendations.
1.4 Indeed, such is the ludicrousness of
the regime that sugar users are obliged to resort to the cumbersome
mechanics of Inward Processing Relief to obtain imported sugar
for processing into exports when EU in-quota supplies are unavailable
even though excess EU sugar is available for export in the form
of "C" Quota.
1.5 EU Governments acknowledged the importance
for agricultural competitiveness of reforming the CAP when the
Agenda 2000 package of measures was agreed in 1999. However, the
sugar regime was ignored leaving manufacturers of sugar-containing
food and drinks vulnerable to increasing competition from manufacturers
in countries where the price of sugar is much lower. UKiSUG members
are not afraid of competition but they must be able to compete
under fair conditions. It is high time that the EU addressed the
lack of transparency and competitiveness in the regime. On several
occasions sugar processors have been found guilty of anti-competitive
practices but no action has been taken to introduce more competitiveness
into the regime and create even an internal EU market for sugar.
2. UKISUG'S OBJECTIVES
2.1 UKiSUG's long term objective would be
the elimination of the EU sugar regime so that it is market led
and the EU's dual pricing system can be dismantled. This would
enable the EU to enlarge and participate effectively in world
trade negotiations without damaging its own food and drink manufacturing
industries. Indeed, the competitiveness of the food and drink
manufacturing industry is of direct interest to sugar producers
and processors. Maintaining a regime which damages competitiveness
and reduces outlets for EU sugar, combined with increasing restrictions
on sugar exports, cannot be to the longer-term advantage of sugar
suppliers.
2.2 As a basis for pursuing reform, the
following policy is recommended:
— a progressive reduction in support
prices;
— the elimination of the storage levy;
— the freeing up of quotas;
— where export refunds are concerned,
the immediate abolition of the 3 Euro FoB costs for Non-Annex
1 exports.
3. THE COMMISSION'S
PROPOSALS
Prices
3.1 UKiSUG is aware that UK producers have
seen prices fall because of the strength of the pound sterling
against the Euro. This contrasts, of course, with previous periods
where the weak currency has raised prices for farmers and processors.
Exchange rate fluctuations should not be allowed to distract attention
from the important principle of introducing competition into the
regime.
3.2 Measured against UKiSUG's objectives,
the Commission's proposals are a first step towards realistic
pricing.
3.3 The proposed price freeze should help
to keep prices down in real terms.
3.4 The abolition of the storage payment
system would have a twofold effect:
(a) it will help to make sugar sales' prices
more competitive as the system of storage payments adds 20 Euros
to each tonne of sugar. Of course, processors will still have
storage costs to bear and this will have an effect on prices.
However, the system will in principle be more open to competition
and this is an objective which UKiSUG fully encourages.
(b) The system of providing aid for storage
means that processors can afford to hold stocks back from the
market and release them in line with their own commercial policy
rather than market demand. This has the effect of manipulating
supply and prices which is not compatible with a free market.
3.5 UKiSUG is nevertheless concerned that
the sugar regime must be addressed coherently and not just as
a budget cost-cutting exercise. UKiSUG fully supports a cut in
the intervention price for sugar but is concerned that, should
market prices remain high, export refunds could then fail to bridge
the essential gap between EU and world prices. The result would
be very damaging to the competitiveness of EU exports. Accordingly,
UKiSUG strongly recommends that export refunds are calculated
in future on actual EU market prices which will enable the intervention
price to be cut without affecting exporters of non-Annex I products.
3.6 Unless either the CAP is reformed to
bring internal prices closer to world prices or a satisfactory
replacement is found to compensate for the insufficiency in the
budget for non-Annex I export refunds, many EU jobs will be threatened
and demand for EU agriculture materials will be reduced and surpluses
will increase.
QUOTA CUTS
3.7 The Commission proposes to cut production
quotas in order to resolve the constraints on subsidised exports
imposed by the Uruguay Round GATT Agreement.
3.8 This measure takes no account of the
competitive position of sugar users. Reducing production will
restrict supply and thereby artificially prop up prices. If EU
prices are high and export refunds limited or unavailable, manufacturers
will be unable to compete internationally.
3.9 Given that reducing quotas is likely
to raise prices and that the export constraints would be alleviated
by lowering prices, the Commission's prescription is therefore
one which will compound rather than solve the problem for exporters
of manufactured products.
3.10 UKiSUG is accordingly disappointed
that the Commission is not tackling the reform of the regime by
relaxing one of its key distortive mechanisms, namely quotas.
Indeed, the proposals to cut quotas are retrograde and inhibit
the evolution of a market-led policy. As quota cuts would apply
equally to alternative sweeteners such as isoglucose or inulin,
the market will remain in a competitive straitjacket. This restriction
on access to alternative nutritive sweeteners is criticised by
the Court of Auditors in its Special Report which concludes that
"the EU's production restrictions are . . . constraining
rational economic development" (paragraph 84).
3.11 The quota system, which allocates quotas
on a national and non-transferable basis, does not even permit
a single market for sugar within the EU. Quotas hold production
in line with consumption which means that there is very little
to trade between Member States and thereby stimulate price competition.
In its Special Report (paragraph 83) the Court of Auditors states
that the quota system means that "normal competitive forces
do not operate and in several cases sugar companies have been
fined for abuses of competition". In addition, the Report
concludes that the allocation of quotas "has had the effect
of preserving sugar production in regions which are not well-suited
to it and which in some cases have required national aids to support
production. Conversely the most efficient production regions have
not been able to obtain increased quotas". (paragraph 89)
4. UKISUG PROPOSAL
UKiSUG is very concerned that there should be
a rational and coherent approach to reform of the regime. In this
respect it strongly recommends that the setting of support prices
is reviewed to ensure that the calculation process is transparent
and based on up-to-date data which reflect actual production costs
and current material yields. It also urges that action on support
measures should be consistent so that measures to reduce CAP expenditure
do not disadvantage sugar users.
5. CONCLUSION
The Commission's proposals acknowledge that
further reform will be considered in 2002 and UKiSUG would urge
that this is done through price cuts and freeing up of production
quotas. The current proposals are a first step in tackling the
constraints of price support but it is critical that restraints
on production imposed by quotas are relaxed so that the regime
can become market-led.
21 November 2000
Competition and price inflation in the
soft drinks industry
The fall in the price of sugar over the last
four years has been passed on to consumers by users of sugar such
as manufacturers of soft drinks. Suggestions to the contrary are
incorrect.
Two points need to be made clear:
— consumer prices for soft drinks are
set by retailers in a highly competitive marketplace;
— sugar represents only 5 per cent
of the cost of manufacturing soft drinks, the rest being other
materials, labour, energy, transport, packaging, etc.
One would therefore not expect the price of
soft drinks to mirror that of sugar exactly. Figures from National
Statistics give the following picture:
The fall in the price of sugar has been reflected
in both the producer and retail prices for soft drinks. They have
risen by less than the rate of inflation, as one might expect
in a highly competitive market where the price of one ingredient
has fallen. A fall of 33.7 per cent in the cost of 5 per cent
of the ingredients (ie sugar) should result in a reduction of
1-2 per cent in the final cost: in real terms, the actual fall
has been greater than this. The suggestion that a reduction in
the price of sugar has not been passed on to consumers is therefore
shown to be false.
It is also worth noting that the biggest mismatch
between changes in the sale and purchase prices of sugar lies
at the processing stage: this is the stage where competition is
virtually absent because minimum prices are fixed and production
is controlled by quotas.
12 December 2000
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